chapter 6 micro

determinants of price elasticity of demand

-substitutability -proportion of income -luxuries vs. necessities -time

Suppose we find that the price elasticity of demand for a product is 3.5 when its price is increased by 2 percent. We can conclude that quantity demanded: a. decreased by 7 percent. b. decreased by 9 percent. c. decreased by 1.75 percent. d. increased by 7 percent.

a

elastic demand

a decrease in price will increase total revenue

inferior goods

a negative income elasticity coefficient. consumers decrease their purchases of inferior good as income rises

Assume that a 6 percent increase in income in the economy produces a 3 percent increase in the quantity demanded of good X. The coefficient of income elasticity of demand is: a. negative and therefore X is an inferior good. b. positive but less than one; therefore X is an inferior good. c. positive and therefore X is an inferior good. d. positive and therefore X is a normal good.

d

price of demand when demand is inelastic

less than 1

cross elasticity of demand

measure how sensitive consumer purchases of one product are to a change in the price of some other product

income elasticity of demand

measures the degree to which consumers respond to a change in their incomes by buying more or less of a particular good

Why does it matter whether demand is unit elastic, inelastic, or elastic in terms of total revenue?

the classification predicts how changes in the price of a good will affect the total revenue earned by producers from the sale of that good

price elasticity of supply: the long run

time period long enough for firms to adjust their plant sizes and for new firms to enter the industy

price elasticity of supply: the short run

too short to change plant capacity but long enough to use the fixed size plant more or less intensively

Do you drop the minus sign for price elasticity of demand?

yes

If the price elasticity of demand for a product is 2.5, then a price cut from $2.00 to $1.80 will: a. decrease the quantity demanded by about 2.5 percent. b. increase the quantity demanded by about 25 percent. c. increase the quantity demanded by about 2.5 percent. d. increase the quantity demanded by about 250 percent.

b

cross-price elasticity of demand

between 2 goods measures the effect of the change in one good's price on the quantity demanded of the other good

Research has found that an increase in the price of beer would reduce the amount of marijuana consumed. This research indicates that the cross elasticity of the two products is a. positive so that beer and marijuana are substitutes for one another. b. positive so that beer and marijuana are complements. c. negative so that beer and marijuana are complements. d. negative so that beer and marijuana are substitutes for one another.

c

What is the price elasticity of demand formula?

change in quantity demanded of x/original quantity demanded of x _________________________________________________________ change in price of x/original price of x

midpoint formula

change in quantity/(sum of quantities)/2 ________________________________________________________- change in price/(sum of prices)/2

price of demand when it is unit elastic

exactly 1

Price of demand when it is elastic?

greater than 1

normal good

income-elasticity is positive, meaning that more of them are demanded as income increases

price falls and demand is elastic

increase

price rises and demand is inelastic

increase

price rises and supply is elastic

increase

price rises and supply is inelastic

increase

If a university passed a rule stating that university students must live in university dormitories, what effect would this have on the price elasticity of demand for dorm space? What effect would this have on room rates? a.The price elasticity of demand would be less inelastic, and room rates would decrease. b. The price elasticity of demand would be more inelastic, and room rates would decrease. c, The price elasticity of demand would be more elastic, and room rates would increase. d. The price elasticity of demand would be more inelastic, and room rates would increase.

D

inelastic demand

a price decrease will reduce total revenue

complementary goods

an increase in the price of one decreases the demand for the other

unit elasticity of demand

an increase or decrease in price leaves total revenue unchanged

If a firm can sell 3,000 units of product A at $10 per unit and 5,000 at $8, then: a. A is a complementary good. b. the price elasticity of demand is 0.44. c. A is an inferior good. d. the price elasticity of demand is 2.25.

d

If the price of hand calculators falls from $10 to $9 and, as a result, the quantity demanded increases from 100 to 125, then: a. not enough information is given to make a statement about elasticity. b. demand is inelastic. c. demand is of unit elasticity. d. demand is elastic.

d

The price of product X is reduced from $100 to $90 and, as a result, the quantity demanded increases from 50 to 60 units. Therefore, demand for X in this price range: a. has declined. b. is inelastic. c. is of unit elasticity. d. is elastic.

d

Price rises and demand is elastic

decrease

cross elasticity of demand equation

percentage change in quantity demanded of product x/percentage change in price of product y

income elasticity equation

percentage change in quantity demanded/percentage change in income

price elasticity of supply equation

percentage change in quantity supplied of product x/percentage change in price of product x

price falls and demand is unit elasticity

remain unchnaged

substitute goods

sales of x move in the same direction as a change in the price of y. then x and y are substitute goods

price elasticity of demand

the ratio of the percent change in the quantity demanded to the percent change in the price as we move along the demand curve

price elasticity of supply

the ratio of the percentage change in quantity demanded of a product or resource to the percentage in its price; a measure of responsiveness of producers to a change in the price of a product or resource

what is price elasticity a measure of?

the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buyers' plans reamin the same

Which of the following is correct? If demand is inelastic, an increase in price will decrease total revenue. a. If demand is elastic, a decrease in price will increase total revenue. b. If demand is elastic, an increase in price will increase total revenue. c. If demand is elastic, a decrease in price will decrease total revenue.

a

Suppose that a 20 percent increase in the price of normal good Y causes a 10 percent decline in the quantity demanded of normal good X. The coefficient of cross elasticity of demand is: a. negative and therefore these goods are substitutes. b. positive and therefore these goods are complements. c. negative and therefore these goods are complements. d. positive and therefore these goods are substitutes.

c

How would the following changes in price affect total rev? Price falls and demand is inelastic

decrease

Price and total revenue move in opposite direction when demand is...

elastic

The more the determinant of demand the more what?

elastic it is

independent goods

two products considered are unrelated or independent

perfectly elastic demand

when any price increase will cause the quantity demanded to drop to zero. The demand curve is horizontal.

perfectly inelastic demand

when the quantity demanded does not respond at all to the changes in the price. when demand is perfectly inelastic, the demand curve is vertical